Blog post originally posted on the b-Logics blog

As we’ve written about before, on March 1^st Fannie Mae announced two changes to their quality control requirements. Both will be effective September 1^st, 2023.

These changes move quality checks up in lenders’ origination processes. Why? Because it makes sense to look at high risk loan characteristics and make sure loans in the pipeline are quality checked before they are sold. It also makes sense to find and fix defects sooner rather than later.

Recently Fannie Mae spoke about significant defects that are on the rise in the quality reviews they are completing with Lenders. While they point out that many issues are being remediated in the sample reviews – it does make you wonder if latent risk is in the production pipeline that could lead to future repurchase.  To avoid this, they also recommend that lenders understand their gross vs remediated defect rate and make changes to avoid regulatory and investor exposure.

With higher Interest rates and the shift to a purchase market, these more complex originations will likely keep defects elevated. So, now is the time to evaluate your quality control function.

• Do you have a way of evaluating high risk loan characteristics prior to closing?
• Can you report on and monitor changes in your gross and net defects pre and post close?
• Are you able to validate loan file data prior to conducting post close audit reviews?
• If you outsource QC, can you “audit the auditor” to assess audit result variances and improve audit accuracy?

Take prefunding reviews for example. If you’re trying to manage gross defects, you should be able to easily select and review loans with characteristics of higher potential risk and complexity. Across the buckets of income, asset, collateral and credit reviews, we have identified 20 component reviews that make sense and support the broadest set of lending profiles. Mix these high-risk loan reviews with pre-closing reviews and you should have a more holistic look at quality across your pipeline.

We’ve all been doing post close reviews, but now with Fannie Mae’s new requirement, we need to do them a bit quicker. If you don’t sell loans to Fannie Mae, it is still a good idea to get insights into loan quality sooner to address systemic issues and keep your closed loans sold, regardless of investor.

Through each step of closed loan file reviews, technology can save you time. Loan sampling tools can help you fine tune selections in ways that make sense for your business. Once loans are selected, automation that checks for missing documents or finds inconsistencies across documents and system data can save time and improve efficiency by using only validated data for audit reviews.

Once the audit process has begun, automation that provides dynamic access to completed files can also give you a leg up on the review and rebuttal process. During the rebuttal stage, technology that can help you manage and track all rebuttals sure beats manual back and forth emails. And let’s not forget integrating checks for fraud or compliance issues that can add depth to your post close reviews.

You may not need to increase your prefunding loan file reviews or shorten your post close audit process, but maybe the benefits those two things bring are worth it. Ramp up QC while you have time to focus on it. When the market shakes lose again, it will be worth it!